The Reserve Bank of India (RBI) has proclaimed its most elevated ever dividend disbursement, totaling Rs 2.11 lakh crore, to the central administration for the fiscal period 2023-24. This determination is anticipated to considerably enhance the Centre’s administration of the financial deficit or the disparity between a government’s earnings and outlay. This apportionment was notably larger than the preceding zenith of Rs 1.76 lakh crore accomplished in 2018-19. The dividend or excess transfer by the RBI to the Centre stood at Rs 87,416 crore for the fiscal year 2022-23. The previous peak was Rs 1.76 lakh crore in 2018-19.
The resolution on the dividend remittance was made at the 608th session of the Central Board of Directors of the RBI conducted under the chairmanship of Governor Shaktikanta Das.
What instigated the escalation in RBI dividend remittance?
The Reserve Bank of India’s historical dividend to the central government likely stemmed mainly from substantial earnings from the forex holdings of the Central bank. RBI’s surplus transfer to the government for the financial year 2024 is grounded on the Economic Capital Framework in line with the recommendations of the Bimal Jalan committee. A research dossier by the State Bank of India posited that the surplus income for the Central bank was ascertained by its liquidity adjustment facility operations and interest earnings from its possession of domestic and foreign securities. Balances under the routine liquidity adjustment facility indicate that RBI was in an absorption mode for a majority of the financial year and absorbed liquidity for 259 days out of 365 days. A hike in the value of gold also contributed to the overall augmentation in RBI’s balance sheet, as per SBI.
Interestingly, the record dividend distribution by the Central Bank surpasses by 40 percent the entire dividend of Rs 1.5 lakh crore anticipated by the Centre from the RBI, state-owned financial institutions, and non-financial public sector enterprises collectively, in 2024-25, in accordance with the provisional budget tabled by the Centre in February last year.
Increased dividends will be advantageous for the incoming government
The budget of the incoming government subsequent to the announcement of election outcomes in June is slated to be presented in July and it will dictate the manner in which the dividend will be employed.
The larger-than-anticipated Reserve Bank of India (RBI) dividend to the government should serve to ensure that the 5.1% of GDP deficit target for the fiscal year concluding in March 2025 (FY25) is met and could be utilized to reduce the deficit beyond the present target, as per Fitch Ratings. The government has indicated its intention to gradually narrow the deficit to 4.5% of GDP by FY26. Persistent deficit reduction, particularly if supported by sustainable revenue-generating reforms, would be favorable for India’s sovereign rating fundamentals over the medium term.
RBI recently proclaimed a historic high dividend transfer to the government amounting to 0.6% of GDP (INR2.1 trillion) from its operations in FY24. This surpasses the 0.3% of GDP projected in the FY25 budget from February and will assist the authorities in achieving near-term deficit reduction objectives. A key factor behind the augmented RBI profits seems to be increased interest income on foreign assets, although the central bank has yet to furnish a detailed breakdown.
The repercussions on the Union Budget In its post-election budget, the incoming government has two alternatives, Fitch Ratings remarked. Initially, the government could choose to uphold the current deficit target for FY25, and the windfall could enable the authorities to further amplify spending on infrastructure, or to offset unexpected expenditure increases or lower-than-projected revenue, such as from disinvestment. Alternatively, all or a portion of the windfall could be saved, lowering the deficit to below 5.1% of GDP. The government’s decision could provide greater clarity regarding its medium-term fiscal priorities.
Economists argue that directing the surplus towards deficit reduction could be advantageous for India’s sovereign ratings. According to Citi Research’s Samiran Chakraborty, utilizing the funds to curtail the fiscal deficit could decrease it by 0.3 percent of the gross domestic product (GDP). This approach is likely to be favored by bond markets, which would witness a decline in yields, as evidenced by a recent dip in bond yields following the surplus announcement. Alternatively, the government could augment spending on infrastructure or introduce populist measures. Equity markets would likely support this course, as increased spending can invigorate economic activity and growth. The Sensex’s ascent by 1,300 points in response to the surplus news underscores investor optimism regarding potential expenditure augmentations.
Can RBI sustain a higher dividend disbursement?
Transfers from RBI to the government could be consequential in influencing fiscal performance but hinge on various factors, including the size and performance of assets held on the central bank’s balance sheet and India’s exchange rate. Transfers may also be swayed by the RBI’s perspectives on what level of buffer is deemed appropriate to maintain on its balance sheet. The potential volatility of transfers suggests there is considerable uncertainty regarding their medium-term trajectory, and we do not envisage that dividends as a proportion of GDP will be sustained at such an elevated level, Fitch Ratings asserted.